As FTX burns, advisers keep their cool

The recent bankruptcy filing by the FTX cryptocurrency exchange, along with the failure of Alameda Research, a hedge fund created by FTX founder Sam Bankman-Fried that had lent money to FTX to keep it going, has echoes of previous financial implosions. Like several of the spectacular flameouts of the past, this one came about as an investment mania lost its mojo.

In the case of FTX, the cooling of the value of virtual coins, a credit squeeze and a flood of redemptions left the company undercollateralized. While crypto traders who kept money on the platform are estimated to have lost billions and other companies in the crypto ecosystem have been dragged down into bankruptcy, the FTX failure doesn’t seem likely to threaten the banking system, markets for conventional financial instruments or the investment portfolios of most Americans. For the latter, no small credit is due to U.S. financial regulations, which restricted access to FTX for most Americans. Credit, too, should go to financial advisers, who have been largely cool to cryptocurrency as an investment.

ADVISERS ARE SKEPTICAL

Despite the public’s fascination with cryptocurrency — among both the minority who understand what it is and others who may have only a partial inkling but are intrigued by its high-tech vibe and its gold-of-the-future aura — most advisers have remained unmoved.

At the core of their skepticism is a lingering question: Is there any there, there? Other than it’s being cool technology, many advisers wonder whether cryptocurrency has any practical advantages over what people around the world already use in transactions. And the fact that it is largely unregulated — a key factor in its appeal — is something that worries most advisers.

Given their questioning of the practical merits of cryptocurrency, it’s no wonder that so many advisers have encouraged their clients to steer clear of crypto as an investment. But many self-directed investors have become involved in crypto-related investing and many large, respected institutions are encouraging investment in the space or are moving to incorporate crypto in some way in order not to be left behind. With this gravitational pull of ever-stronger public interest in cryptocurrency, standing on the sidelines and not succumbing to the enthusiasm has become more difficult. It’s likely, in fact, that many clients whose advisers have counseled against investing in crypto are using other accounts for their do-it-yourself forays into the crypto market.

But hats off to the advisers who stood their ground, not following the herd, but acting as the responsible, designated drivers for their clients’ serious money. Look at it this way: What if these advisers are wrong and crypto turns out to be a great investment? Fine, there will be money to invest later because that money wasn’t lost now.